Gross retention and net retention are important metrics for any recurring revenue business, but they differ in assessing customer performance and provide details on overall growth.
Gross retention measures the percentage of revenue retained from existing customers, excluding any upsells or expansions, while net retention reflects the recurring revenue from existing customers, including expansions, downgrades, and churn.
The problems start when companies stick with one metric and are unsure which metric is best to measure and when. Without proper usage, it leads to overestimating business health or missing out on growth opportunities.
Keep on reading to learn the details on the difference between gross revenue retention and net retention rate, with suggestions for usage timelines.
What is Gross Revenue Retention (GRR)?
Gross Revenue Retention measures the percentage of recurring revenue generated from existing customers over a specified period. It assesses any new revenue generated from upgrades, cross-sells, or expansions.
In simpler terms, GRR highlights how well a company can maintain its revenue without considering any new growth from the existing customer base. GRR focuses only on losses due to churn or downgrades.
For instance, if a customer reduces their subscription or cancels altogether, all you need to subtract from the starting MRR and then calculate the GRR. Typically, upsells and additional products are not included in this calculation.
With a higher GRR, you can ensure that the company is successfully maintaining its core revenue. Whereas a low GRR highlights some potential issues with customer satisfaction or churn. Since the GRR cannot exceed 100%, it ensures a view to show how effectively a company is preserving its existing revenue.
How to Calculate Gross Retention?
To calculate GRR on a specific period, you need the remaining revenue from existing customers at the end of that period. Now, simply divide the number by the original revenue from those customers at the start of the period. Lastly, multiply the answer by 100 and get the desired GRR.
You can use this standard formula:
GRR =
(Starting MRR – Churned MRR – Downgraded MRR) / Starting MRR × 100
Where,
- Starting MRR = It is the total recurring revenue from your existing customer base at the beginning of the period.
- Churned MRR = It refers to the revenue lost due to customer cancellations.
- Downgraded MRR = This is the revenue lost due to customers downgrading their plans or if they are reducing the scope of their service.
Let’s say TechSolutions Inc., a SaaS company, has started with $100,000 in monthly recurring revenue at the beginning of the month. Over the month, it has lost $10,000 in churned revenue. And $5,000 in downgraded revenue, it is from the existing customers who switched to lower-tier plans
So, the calculation would be:
GRR =
(100,000 – 10,000 – 5,000) / 100,000 × 100
Or, 85%.
That means the company has retained 85% of your original revenue from existing customers during that period.
What is Net Revenue Retention (NRR)?
Net Revenue Retention is a SaaS metric used to measure how much recurring revenue is retained and increased from existing customers over a given period. It is considered through customer churn, downgrades, and expansion.
As with the gross retention, it mainly focused on revenue lost due to churn and downgrades. One additional fact is that the NRR measures revenue generated through plan upgrades or cross-sells and upsells. Through that, you can get a detailed view of customer success. It’s not just stuck in the number of retained numbers rather how much they are getting value.
NRR is particularly valuable as it highlights the long-term value of your customer base. If the result is over 100%, it is an indication of maximized revenue growth, which is greater than the revenue lost from churn or downgrades. It is a strong sign of product-market fit and enhanced customer satisfaction.
How to Calculate Net Retention?
To calculate Net Revenue Retention, simply subtract churned revenue and downgraded revenue from expansion revenue. Now, divide it by the starting revenue and then multiply by 100.
You can use this standard formula:
NRR=
(Starting MRR−Churned MRR−Downgraded MRR+Expansion MRR)/Starting MRR×100
Where,
- Starting MRR: It is the total amount of revenue generated from existing customers at the beginning of the period.
- Expansion MRR: This is the revenue gained from upsells, add-ons, or upgrades through existing customers.
- Churned MRR: Revenue lost due to customers canceling their subscriptions.
- Downgraded MRR: It is the lost revenue amount when customers turned their subscriptions to a lower-tier plan
For instance,
Let’s say a company starts with $100,000 in MRR and loses about $10,000 due to churn. It also experiences $5,000 in downgrades, but also gets about $8,000 from the expansions.
So, the calculation would be
NRR=
(100,000−10,000−5,000+8,000)/100,000×100
Or, 93%
That means the company has retained about 93% of its original recurring revenue. It is even after causing churn, downgrades, and expansions.
Gross Retention vs Net Retention: Key Differences
Here’s a detailed overview of how these two important metrics differ:
- Revenue coverage: GRR focuses on the revenue retained from the customers who are continuing on their original plans. On the other hand, NRR gives a detailed view by considering additional revenue generated through upsells, plan upgrades, and cross-sells.
- Maximum value: GRR is limited to a maximum of 100%. This is because it only measures the retention of existing revenue without considering any additional growth. In contrast, NRR can easily touch the 100%+ mark when the revenue from the expansions, upsells, or cross-sells is higher than churn or downgrades.
- Growth signal: GRR shows the effectiveness of retaining existing revenue without any growth factor included in the terms. On the contrary, NRR is mainly the growth signal that shows whether your customer base is increasing in value over time.
- Interpretation risk: GRR may undervalue the company’s performance as it only focuses on revenue retention without growth. While the NRR can appear higher, even if churn is high. It is because the revenue gained from expansion is greater than the churn loss.
- Use case: GRR is best used when you want to define the churn and retention status of your business. While NRR is the go-to metric to know the effectiveness of monetization strategies and explore long-term growth.
Why Do You Need to Track Both Metrics?
Tracking your company’s performance with one metric may not provide you with a detailed view or might miss the right information. So it is important to have the best usage of both metrics.
With the Gross Revenue Retention, you can understand how much of your core revenue you’re able to retain, excluding any growth. If the number is declining, it is a sign that churn or downgrades are starting to affect your customer base. This is the crucial warning sign you can’t ignore anymore.
Coming to the Net Revenue Retention, which sees how much additional revenue you’re generating from existing customers. It is through upsells, cross-sells, and upgrades. So with a strong NRR, you can rest assured that it is a positive indicator.
So overall, relying on only one metric can create a false sense of security, or you may overlook some important risks:
- GRR helps you find how well you’re retaining your customer base.
- NRR shows how much you’re earning from customers who are loyal.
In case you find a weak GRR, you need to improve customer retention and address churn. But if the NRR is strong, it is a good sign for monetization. Still, you need to be careful about possible churn.
Which Metric Should You Use — and When?
Both GRR and NRR are critical metrics, but come with different purposes based on what you’re measuring:
- Use GRR when you want to get a clear view of how effectively you’re retaining your core revenue. It is a strong indicator of customer satisfaction, churn, and the effect on customer accounts. It’s particularly useful for early-stage companies or when they try to find the foundational “stickiness” of their product.
- Besides, use the NRR when you want to get the total value you’re generating from your existing customer base over time. It is particularly helpful for the growth-stage companies where the upselling, cross-selling, and product expansion are the core factors for revenue growth.
How to Choose Based on Your Goals:
- When you want to measure churn or retention health, focus on GRR.
- If you want to measure revenue growth from your current customers, use NRR.
- But when you want to get reporting to leadership, boards, or investors, utilize both metrics. For instance, GRR indicates the customer stability while the NRR highlights the growth potential.
How to Improve Gross and Net Retention
To improve both GRR and NRR, focus on reducing churn through customer satisfaction, proactive engagement, and driving expansion through upsells, cross-sells, and plan upgrades.
Improving Gross Retention (GRR)
As GRR indicates, how effectively you retain core revenue, your core focus is only on minimizing churn and downgrades through improving the overall customer experience. Here is how you can do that:
- Streamline onboarding: Boost the time to value by guiding customers through the setup process and helping them achieve success earlier.
- Proactive support: Take a proactive approach to customer success. For instance, monitor the account health and take action at the first sign of potential issues, rather than making it worse.
- Customer education: Ensure customers are getting proper support through resources, tutorials, and product tips. It helps to build lasting relations with the customer.
- Gather feedback and act on it: Make sure you are properly utilizing the customer feedback. Actively listen to their concerns and use insights to enhance satisfaction.
- Identify churn signals early: Utilize the data to identify the drop-off points, reduced usage, or declining engagement. This way, you can easily mitigate the churn risk.
Improving Net Retention (NRR)
To improve your NRR rate, all you need to focus on is driving revenue growth from your existing customer base. It ensures your expansion opportunities are seamless and work well.
- Create upsell and cross-sell paths: Use data to identify relevant add-ons or upgrades and show them at the right time.
- Segment by usage and potential: Do a deep analysis of the customer behaviors to identify those ready for additional products or services. You can find the proper customer group for growth.
- Invest in Customer Success: Train the CSM team with the skills to identify expansion opportunities. It is not just about mitigating churn risk but also driving long-term customer value.
- Introduce usage-based pricing: Adjust your pricing strategy with customer growth. The pricing model should scale naturally with the customer getting more value.
- Build a product-led expansion motion: Utilize in-product prompts, milestone achievements, or feature unlocks. It helps the customer to pick upgrades and lets them add additional purchases.
In Closing
Gross and net retention are more than just numbers. They are key indicators to building a lasting relationship with your customer base. Gross retention reveals the state of your revenue growth, while net retention identifies the additional value you’re getting from existing customers.
So you can understand, both metrics are crucially important, and relying on only one can give you an incomplete picture. The smartest teams monitor both metrics together. It’s not just for reporting purposes, but to guide strategic decisions. In a world where customer retention drives success, it’s no longer enough to acquire new customers—you need to keep them loyal.
